MTV Nears Sweeping German Deal

10/18/1998 8:00 PM Eastern

By: WILLIAM MAHONEY and DIETER BROCKMEYER

MTV/VH1 International is expected to confirm this week that
it has lost the most lucrative arrangement that an American network has ever had in
Germany  the largest cable market in the world outside of the United States.

But a new deal is likely to offer MTV's services much wider
distribution potential. Both the loss and the gain will be watched closely by other U.S.
channels that are seeking carriage in Germany, as MTV is renowned for having the
state-of-the-art deal in that country.

MTV is the only U.S.-based programmer to have ever secured
a per-subscriber payment from Deutsche Telekom, one of the world's largest MSOs. It has
been earning about $6 million per year from the payments since 1995, sources said.

In sharp contrast, a new channel signing up for
distribution to the 17 million analog subscribers that Telekom currently controls would
have to pay nearly $2 million annually in carriage fees.

Losing the $6 million annual payment will be a real blow to
MTV, sources said, but officials insisted that MTV will gain other terms with Telekom. The
new deal could result in the launch of "The Suite" block of services that MTV
and VH1 have started in the United States, possibly on Telekom's new digital platform.

German sources said MTV is hoping to capitalize on
Telekom's new offer of revenue-sharing deals in the digital realm  something that
doesn't exist in the analog arena.

"There are so many rumors in the market right now that
it is not likely for any of it to be the truth," said Christiane zu Salm, general
manager of the German MTV operations.

However, Torsten Kreindl, department head for
broadband-distribution networks and services at Telekom  the point person on the
German cable side  acknowledged, "It may very well turn out that the [MTV
carriage] contract will be canceled."

Simon Guild, chief operating officer of MTV Networks
Europe, stressed that the per-subscriber payment that MTV has been receiving was just one
aspect of far-ranging discussions.

"It's much more complex than that," he said.
"We're looking at how to develop the market in Germany, and there are all kinds of
elements to that. We're having all kinds of discussions with Telekom about a whole range
of issues, which may involve restructuring the way that we organize our deal."

At press time last Friday, Telekom and MTV were putting the
finishing touches on a deal that they planned to announce this Thursday (Oct. 22), sources
said.

The German payment deal, secured in 1995, had given MTV
leverage in other European countries where operators insisted on payment for carriage and
refused to pay subscriber fees to channels. Losing that element of the German deal could
weaken MTV's argument in those markets.

However, MTV's reputation as a network championing the
payment cause was heightened when it pulled its channel off the A2000 system in Amsterdam,
Netherlands, in August, rather than paying an annual fee that all channels pay that
operator for carriage. Sources familiar with the situation put that fee at $361,000.

MTV said the fee was way too steep, adding that the
operator was cutting back MTV's programming time to eight hours per day.

As part of the 1995 agreement, MTV scrambled its signal and
agreed to be exclusive to cable in Germany. It's unclear whether part of the new
arrangement will open up satellite-distribution opportunities for MTV in Germany, but one
related negotiation seems to suggest that: MTV is discussing the possibility of taking
over the satellite transponder vacated by Nickelodeon Germany on May 31, after that
channel shut down.

A German source said Viacom Inc., parent company of
Nickelodeon and MTV, had been close to terms for his company to take over the Nickelodeon
Germany transponder, but Viacom then canceled the talks.

Using the former Nickelodeon transponder would help MTV to
widen its distribution in Germany, which can earn European channels nearly one-third of
their total cable and satellite carriage.

MTV officials declined to comment on whether they planned
to take over the transponder. Nickelodeon proved to be a major embarrassment to Viacom
after it racked up $75 million in losses. The closure was the biggest retreat by a U.S.
cable company in Germany, where many programmers are struggling.

In contrast, MTV has been profitable in Germany since 1992,
according to statements by zu Salm in a recent German magazine interview. She said MTV
made a $12 million profit from Germany in 1997, and it will make about $15 million this
year.

For Telekom's part, the cable operator wants to offer MTV's
channels on the new digital package that it launched in September, which so far is mostly
focused on ethnic channels.

"There is no sense to go on in analog while the future
is in digital," Kreindl said.

Telekom is offering the digital package to subscribers for
an extra fee, with the full marketing of the service just kicking in.

Among the other issues on the table is a consideration by
MTV and VH1 to move their German base from Hamburg to Munich. A decision on that issue was
said to be close to conclusion at press time.

The state of Bavaria, where Munich is located, is very keen
to promote Munich as the German media center, and it is offering huge tax savings to
companies that decide to move to that city.

Munich competes with Cologne in trying to attract channels
to Germany. Nickelodeon was based in Düsseldorf, just outside of Cologne. MCN